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State Government Finances in Kerala and TamilNadu
Project Outline Five years ago many of the state governments, such as Andhra and Kerala were nearly bankrupt and could not pay the bills. This is not the case anymore. Objective is to find out financial positions of the state governments from 1997 to 2007, i.e.revenues, expenditure and level of deficits. If the deficits went up during that period, what were the factors that determined it. If the deficits have come down in the last few years relative to the size of their state GDP or state revenues, we would like to know why and how. Where did the addl money come from. Research information Kerala: i Financial Indicators: Table 1 -'' ii Revenue Receipt and Expenditure: ''Table 2 -'' ''Table 3 -'' iii Deficits: ''Table 4 -'' Article: http://www.keralaplanningboard.org/html/Economic%20Review%202006/Chap/Chapter2.pdf Mounting fiscal deficits and high growth in nondevelopment expenditure are the two major problems confronting State’s fiscal position. During the period 1993-94 to 2001-02, the fiscal deficit grew by a rate of 16.9 per cent and the non-development expenditure by 15.50 per cent. The unique achievements that the State made in several sectors are getting undermined for want of adequate resources for their maintenance. Health, education and infrastructure are the sectors most affected by the situation. The problem of elderly, mounting unemployment, increasing rate of morbidity, re-emergence of fatal diseases, deterioration in the quality of education, high cost in health care and education etc are some of the problems facing the State. To address these issues, large-scale investments are required. Besides, the total investment required for attaining the Tenth Plan targeted growth rate of 6.5 per cent is estimated to be around Rs 50000 crore, including the State Plan outlay of Rs. 24000 crores. Unless speedy measures are taken towards a purposeful fiscal consolidation, the State would not be in a position to have the required resources to prevent diversion of loans to revenue expenditure and thereby get the ability to make higher capital investments. Fiscal consolidation requires augmentation of revenue and restraining of expenditure. Own revenue realisation needs to be streamlined and boosted; especially non-tax revenue. Considering the higher allocations being provided for the public spending, it has become inevitable to rationally enhance the user charges of services being rendered by the Government, in a progressive manner. The State Government has argued before the Twelfth Finance Commission its case strongly for basic changes in the scheme of Central transfers and grants. The States’ fiscal problems can be tackled only if its own efforts are supported by Economic Review 2003 higher Central transfers and comprehensive debt relief. Even while demanding alteration in devolution criteria, all possible efforts are to be made for availing of maximum assistances under discretionary grant/project based grant by raising State’s special problems such as acute unemployment, problems of elderly, second generation problems, industrial backwardness, low level of Central sector investment etc. Article: http://www.kerala.gov.in/dept_planning/er/chapter2.pdf ''Table 5 - '' Article: http://www.keralaplanningboard.org/html/Economic%20Review%202006/Chap/Chapter2.pdf iv Debt: ''Table 6 -'' v. Performance of Kerala during 10th Five Year Plan: The nominal GSDP grew at an annual average rate of more than 12.5% and if we consider the first four years of the plan, the own tax revenue of the State increased at a rate of only 13.5% registering an extremely low tax buoyancy as compared to other States in India. The expenditure grew only at an annual average rate of 10.6%, registering an expenditure elasticity of less than unity with respect to GSDP and lowering the government expenditure to GSDP ratio during first four years of 10th Plan for which data are available. As a result, during this period, the fiscal deficit grew only at an annual average of 2% as compared to 12% growth in nominal GSDP. In fact, actual revenue deficit registered negative growth rates during 2003-04, 04-05 and 05-06 lowering its proportion to GSDP from 5% to just 3%. The fiscal deficit to GSDP ratio has also come down from 6.2% to 3.66% by 2005-06. Comparatively lower tax buoyancy caused lower growth rate in revenue and most of the extra revenue has been utilized in lowering the deficit as a proportion to GSDP. As a result, given the increasing trend of non-plan expenditure, the developmental and plan expenditure have suffered (graph below) and grown at a much lower rate than GSDP. 'Figure 1 -' 'Figure 2 -' Article: http://www.keralaplanningboard.org/html/Economic%20Review%202006/Chap/Chapter2.pdf vi Measures Taken: The State Government has already initiated many fiscal reform measures. Enactment of ‘The Kerala Fiscal Responsibility Act, 2003’, ‘The Kerala Ceiling on Government Guarantees Act, 2003’, closure of TP Accounts, measures for debt swap in the context of current low interest rates, re-deployment and restructuring initiatives for an efficient Civil Service etc. are some of the important measures taken . ‘The Kerala Fiscal Responsibility Act, 2003’ envisages reduction of the revenue deficit to ‘nil’ and the fiscal deficit to 2 per cent of the GSDP, by the end of March, 2007. Prioritisation of expenditures, restructuring of public sector units, growth oriented sectoral policies, speedy and time-bound completion of long pending feasible projects, new budget cycle facilitating early budget implementation, legal authority for financial management and responsibilities, improved asset management system etc are certain other measures being taken up by the Government, with which it is expected that the State can achieve fiscal soundness and sustainability in two to three years. Article: http://www.kerala.gov.in/dept_planning/er/chapter2.pdf Tamil Nadu: i Deficits: ''Figure 3 -'' ''Figure 4 -'' ii GSDP: ''Figure 5 -'' Chart: http://www.tn.gov.in/spc/tenthplan/chart/planoutlay.htm ''Table 7 -'' Article: http://www.tn.gov.in/spc/annualplan/ap2007-08/1.2_physical.pdf iii Expenditure and States’ Own Tax Revenue: ''Figure 6 -'' The revenue expenditure has more than doubled in the last five years. The growth rate of revenue expenditure peaked in the years 1998-99 and 1999-2000. This was on account of payment of arrears of pay, increase in salaries of Government servants and pension liabilities. Article: http://www.tn.gov.in/budget/archives/white5-1.htm Tamil Nadu has the highest percentage of State’s Own Tax Revenue to GSDP in the country. In view of this, the correction required in the revenue account was mainly dependent on slowing down the growth of revenue expenditure. Tamil Nadu has been successful in controlling the pace of growth of revenue expenditure in spite of huge one time expenditure on account of Tsunami relief and the recent flood relief. The rate of growth of revenue expenditure has been brought down to about 14% in the Revised Estimates 2005-2006 from a high of 19.16% during 2002-2003. This adjustment was possible through some restraint on overall salary and pension related expenditure. Expenditure on salaries and pensions, which reached a high of 102.85% of the State’s Own Tax Revenues in 1999-2000, 93.18% in 2000-2001, 88.70% in 2001-2002, has now been stabilized at about 65%. Incidence of salaries and pensions expressed as a percentage of Total Revenue Receipts has also declined from a level of 68.78% in 1999-2000 to about 43% in R.E. 2005-2006. The State has been very successful in bringing down the rate of growth of the interest commitment. Interest payments presented as a percentage of Total Revenue Receipts, after reaching the danger mark of about 20% has started coming down. This correction was achieved through swapping / foreclosing of high cost loans and also by good control and management of debt. It is the intention to continuously monitor the sustainability of debt. Article: http://www.assembly.tn.gov.in/archive/Budget/2006-2007int/Budget2006_07int_5.htm ''Table 8 – States’ Own Tax Revenue Table at: http://www.rbi.org.in/scripts/PublicationsView.aspx?id=10049 Table 9 -'' Table at: http://www.rbi.org.in/scripts/PublicationsView.aspx?Id=9068 'Table 10 -' Table at: http://www.rbi.org.in/scripts/PublicationsView.aspx?Id=4895 'Table 11 -' Table at: http://www.rbi.org.in/scripts/PublicationsView.aspx?Id=6461 iv Borrowings: At 2001-02 prices, small savings during the Ninth Plan were projected to be around Rs 542 billion and realisations were to the tune of Rs 1,027.50 billion. During the Tenth Plan, however, all the states have projected small savings mobilisation of Rs 2,037 billion -- almost double the Ninth Plan projection. States' own borrowings would include loans against small savings, negotiated loans from financial institutions, bonds/debentures and SLR based borrowings from banks. In the Budget for 2002-03, the Centre had allowed state governments to access 100 per cent of the small savings fund, as against 80 per cent allowed earlier. The rider was that the balance 20 per cent was to be used to retire earlier high cost loans against small savings. State government borrowings had ballooned during the Ninth Plan period basically due to two reasons. One was the implementation of the pay commission recommendations and the other was the manufacturing recession, which affected both state government revenues and devolution to states from the Centre. In order to meet expenditures, state governments ended up borrowing more at a time when the cost of borrowing was high. The average annual growth of debt stock during the latter half of the 1990s was 18 per cent, significantly above the growth rate of state revenues at 11 per cent. Bond/debenture based borrowing, the most criticised component of state borrowings, is projected to touch Rs 400 billion in states as a whole during the tenth plan period. SLR based borrowings as a percentage of total borrowings, are however projected to decline in most states except Karnataka, Tamil Nadu, Rajasthan and Andhra Pradesh. In order to check the problem of growing state indebtedness, the Centre and the Reserve Bank of India have imposed a number of limits on how and how much states can borrow and the results are expected to show in the next plan period in the form of decelerating growth of state borrowings. Article: http://www.rediff.com/money/2002/aug/02stafin.htm v Debt: ''Table 12 -'' Article: http://www.tn.gov.in/budget/archives/white5-1.htm ''Table 13 -'' Article: http://www.keralaplanningboard.org/html/Economic%20Review%202006/Chap/Chapter2.pdf vi Performance during Ninth (1997-2002) and Tenth Plan (2002-2007): The schemes implemented by the Department during the Ninth Plan period relate to strengthening and consolidating the data base in the State. Various publications and reports with an eye on accuracy and consistency were released in time during the Ninth Plan period. An outlay of Rs. 720.00 lakhs was provided for the Ninth Five Year Plan (1997-2002) for carrying out various ongoing and new schemes. As against this, the expenditure incurred is Rs. 479.74 lakhs. This includes an amount of Rs. 100.81 lakhs on Agricultural Economics and Statistics. The Tenth Plan Performance The Tenth Plan for the State of Tamil Nadu projected the State sector outlay to be Rs. 40,000 crore at 2001-02 prices. Though the State was able to allocate more than the outlay of the Tenth Plan in current prices, in real terms (at 2001-02 prices), it could spend about 92 %. The details of Plan Expenditure for the different years of the Tenth Plan are given in the following Table. ''Table 14 -'' Article: http://www.tn.gov.in/spc/annualplan/ap2007-08/1.2_physical.pdf vii Outcomes: The State continues to outperform the targets fixed under the Medium Term Fiscal Plan (MTFP) due to enhanced tax receipts, reduction in pace of growth of revenue expenditure and better management of debt. The fiscal space thus created has resulted in an unprecedented increase in the Capital outlay. The total capital expenditure is estimated at Rs. 5334.54 crores in the Interim B.E.2006-2007. This will be an increase of about 345% over the capital expenditure during 2000-2001. Tamil Nadu has been able to provide for the maintenance of assets as per the Twelfth Finance Commission norms. With the correction in the overall fiscal situation, attention will be paid to providing adequate resources to priority sectors such as health and family welfare, education and nutrition. The trends in the current year show that the rolling targets set out in the MTFP are well within reach and the State is well on its way to achieving fiscal consolidation Article: http://www.assembly.tn.gov.in/archive/Budget/2006-2007int/Budget2006_07int_5.htm South Indian States – Tamil Nadu, Kerala, Andhra Pradesh and Karnataka: Finances of the State Governments have been under severe stress over the years, especially from the second half of 1990’s. The GFD-GDP ratio of all States, which was 2.6 per cent in 1995-96, increased year after year and attained a peak level of 4.7 per cent in 1999-00. Revenue deficits and primary deficits also behaved almost in the same manner. Inadequate buoyancy in revenue receipts and the rising level of revenue expenditures are the major factors that contribute to the higher rate of deficits. Significant part of borrowed funds are being utilised for meeting revenue expenditure. Dependence on borrowings under public account for financing of GFD has been on the increase in many States. Article: http://www.kerala.gov.in/dept_planning/er/chapter2.pdf i States’ Own Tax and Non-Tax Revenue: According to the budget estimates for 2006-07 own tax revenue is supposed to have increased by Rs.1883.22 crore (19.26%) compared to 2005-06. During the period 2005-06 the highest growth rate was achieved by stamps and registration fees (42.05%) followed by excise duty (12.67%). Though the revenue from tax on sale has increased in 2005-06 the rate of growth was only 5.02 per cent as against the growth rate of 11.84 per cent during 2004-05. The Value Added Tax (VAT) was introduced in the state from 1 st April 2005. In 2005-06 the Government of India released Rs.456 crore as grant to state government to cover the revenue loss due to introduction of VAT. It is noteworthy in this context that only 50 per cent of the State's revenue expenditure can be met with the state's own revenue. Effective measures have to be initiated for augmenting state's own tax revenue at the earliest. Hence, Kerala's own tax revenue to GSDP ratio has been stagnating slightly above 9% of GSDP, whereas the other South Indian States have succeeded in raising their tax GSDP ratio quite significantly, and even the All States average has been on the rise since 2001-02. ''Figure 7 – State's own nontax revenue constitutes on an average, only 8 to 12 per cent of state's own revenue. Analysing the pattern of revenue it can be seen that revenue from social development services is gradually emerging as the major component of non tax revenue, a position which was occupied earlier by revenue from forest. The annual average growth rate of nontax revenue over the period 1995-96 to 2006-07 is 7.70 per cent while that of state's own tax revenue is 12.08 per cent. Table 15 -'' ii Deficits: Both the fiscal deficit to GSDP ratio and the revenue deficit to GSDP ratio are the highest in Kerala among all South Indian States and stand above the all States' average. The major deficit indicators of Kerala, which peaked in 1999-00, showed a downward trend thereafter right until 2005-06. A casualty of this process however was plan outlay. The actual plan outlay over the first four years of the tenth plan was no more than about three quarters of the plan target. Kerala brought down deficits inter alia by cutting back on plan outlays. It did so because the pressure to curtail deficits was enormous. The Fiscal Responsibility and Budgetary Management Act (FRBMA) of the Centre, passed in 2003, wants the Central government to bring down its fiscal deficit to 3 percent of GDP by 2007-08. The Centre also insists that the state governments should do the same as regards their fiscal deficit to GSDP ratio. ''Figure 8 -'' ''Figure 9 -'' iii Debt: ''Table 16 -'' iv Central Tranfers: ''Table 17 – v Plan Expenditure: In the revised budget for 2006-07 plan expenditure has been increased by Rs. 232.13 crore and nonplan expenditure by Rs. 1320.67 crore. The ratios of developmental expenditure and of plan expenditure to GSDP have been compared for all South Indian States and all the States in India taken together. In Kerala these are the lowest among South Indian States (Kerala's figures for 2006-07 are taken from nonrevised budget) on both counts. Figure 10 – Article: http://www.keralaplanningboard.org/html/Economic%20Review%202006/Chap/Chapter2.pdf category:Research Article